Pacific Union, Compass CEOs weigh in on their mega...

2of2Pacific Union CEO Mark McLaughlin, who will become Compass’ president of California, says the firm will look to grow its commercial brokerage business.Photo: Pacific Union

Compass, a venture-backed real estate brokerage firm in New York, will buy 100 percent of San Francisco’s Pacific Union International to create the nation’s third-largest residential retail brokerage, the two companies confirmed Wednesday.

Compass will pay an undisclosed sum of cash and stock for Pacific Union, California’s largest residential brokerage firm. Pacific Union will change its name to Compass, and its CEO Mark McLaughlin will become Compass’ president of California.

The deal was “not driven” by Pacific Union’s majority owner, Fidelity National Financial, a Florida title-insurance giant, McLaughlin said. Fidelity owns about 62 percent of Pacific Union, McLaughlin owns 23 percent, Pacific Union President Patrick Barber owns 6 percent and “a number of people own the rest,” he said.

Just five years old and backed with $775 million from the Japanese fund Softbank and other investors, Compass has been raising the ire of competitors by gobbling up agents and whole firms, including Paragon Real Estate Group of San Francisco in early July.

Compass Buys Pacific Union

Last month, Zephyr Real Estate asked a Superior Court judge in San Francisco to issue a restraining order preventing Compass from soliciting its personnel. Compass had expressed interest in buying Zephyr earlier this year, and while the two were in talks, Compass signed an agreement not to disclose Zephyr’s confidential information. It also barred Compass representatives with access to the confidential information from recruiting Zephyr people. Zephyr claimed that Compass violated the agreement by poaching its personnel, including two managers, while the talks were ongoing. The judge this month granted a temporary order preventing four Compass executives including its CEO, Robert Reffkin, from soliciting Zephyr agents and employees.

Even Pacific Union’s McLaughlin had been somewhat critical of Compass in the past. When it acquired Paragon, he said in a statement, “This move in San Francisco combines Paragon, a relatively conservative local firm, with Compass, a ‘stated’ technology firm.”

On Wednesday, however, McLaughlin lauded Compass’ technology. “I call it connecting the cloud with the street,” he said — the cloud being Compass’ technology and the street being Pacific Union’s traditional, people-oriented brokerage.

Unlike other brokerage firms that procure third-party technology for their agents, Compass has about 200 engineers developing proprietary tools, said Reffkin, who grew up in Berkeley.

“We have a mobile app that lets agents have their business in their pockets,” and a “collaboration tool that’s like Pinterest for real estate. You and your client can put in anything you like, add people to that collection and you are all commenting together.”

Randall Kostick, CEO of San Francisco’s Zephyr, contends that Compass “is not attracting agents and managers with their fabulous products and services. They are attracting them with money.” Traditional real estate agents are independent contractors affiliated with a brokerage firm that takes part of their commissions in exchange for marketing and other overhead services.

Kostick said Compass is offering “signing bonuses, marketing subsidies, technology subsidies, and exceptionally high agent splits,” with agents keeping 90 to 95 percent of their commissions. He said the average split at his and other firms is around 85 to 87 percent.

Reffkin wouldn’t say what compensation Compass is offering, but “people definitely think it’s much bigger than it is.” He said agents are joining Compass “because they want to be part of the company that is building the future of real estate.”

Pacific Union had lost agents to Compass, including “a pretty strategic team in Beverly Hills,” McLaughlin said. “Compass has grown aggressively by putting pretty significant financial incentives in front of people.” He said he thinks that will change with the acquisition of Pacific Union. “I think the credibility we bring in California will permit the balancing of some of the conventional versus new-wave recruiting techniques.”

This year, Pacific Union and Compass were the nation’s fifth and sixth largest residential brokerage firms, respectively, by dollar volume. Each did about $14 billion worth of transactions, according to industry consultant Real Trends. Combined, they would have ranked third, behind NRT (a conglomerate that includes Coldwell Banker, Sotheby’s International Realty and Climb) and Home Services of America (a Berkshire Hathaway affiliate.)

In San Francisco alone, Pacific Union, Paragon and Compass each ranked among the five largest brokerage firms in the first half of this year, according to the San Francisco Association of Realtors. Had they been combined, the three firms would have had 22.6 percent of the market by number of transactions and 27 percent by dollar volume.

Reffkin said Compass has “no intention to acquire more” firms in San Francisco. He said it is expanding throughout the Bay Area but is not talking to any other firms right now.

Zephyr’s Kostick said, “I think they are absolutely on the hunt, especially in the South Bay.”

The real estate industry “is seeing an influx of different business models,” such as brokerage firms that employ agents as employees or do away with agents that represent buyers, said Nancy Robinson, Coldwell Banker’s regional vice president for the Bay Area. She said the Compass-Pacific Union deal “reaffirms the traditional brokerage model. They are acquiring a known brand to expand their brand. That’s nothing new. We have grown by acquisition for decades.”

McLaughlin said the combined firm will be looking to expand its commercial brokerage business. He added that the Mark Co., a brokerage firm Pacific Union acquired that mainly markets new condo developments, might keep its name for a while.

J. Rockcliff Realtors, a brokerage based in Danville wholly owned by Fidelity National, was not part of the acquisition.

A previous version of this story gave an imprecise description of a recruiting agreement between Compass and Zephyr. The story has been updated with correct information.

Kathleen Pender writes the Net Worth column in The San Francisco Chronicle. She explains how the big business and economic news of the day affect a household's net worth. She covers saving, investing, debt, taxes, housing, mortgages, retirement plans, employment and unemployment with a focus on issues specific to California and the Bay Area.

When it comes to big financial decisions, she believes that the simplest answer is almost always the best and that people would stay out of money trouble if they didn't get involved in things they can't understand. Pender welcomes questions from readers and frequently answers them in her column.

She majored in business journalism at the University of Missouri-Columbia and was a Knight-Bagehot fellow in business journalism at Columbia University.